This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

Trust in the FOMC is Dwindling


Chief Market Analyst, Stock Traders Daily

  • Fed Chair Powell has said the recent FOMC rate cut was not the beginning of a cycle.
  • The BOND Market does not believe that.
  • Trust in the FOMC is dwindling.

An inverted yield curve tells us that the BOND Market thinks the FOMC has not cut interest rates enough, and as a result the risk of recession has increased.  This is a concern because it further implies that the FOMC is not recognizing economic risks efficiently enough to act ahead of time.

Therefore, there are two concerns stemming from an inverted curve:

  1. It signals that a recession is coming
  2. It signals that the FOMC is behind the curve.

My opinion has always been that money speaks, and we should listen.  This is why we use technical analysis for our trading strategies.  The opinions stock market investors make with their pocketbooks can be seen clearly in the technicals, and we can use that to our advantage, and we attempt to do exactly that in our Strategies.  Review the Strategies.

However, my opinion has also always been that the BOND Market is smarter than the stock market.  That is, after all, where the BIG money is invested.  I have found BOND Market investors do their homework much more carefully and often with longer term objectives, too. 

Therefore, I place great value on the ‘pocketbook-readings’ from the BOND Market, when they come (they do not come often).  I consider the investors there the smartest in the room, and when they speak with their pocketbooks we should listen.  This time is no different.

While the FOMC Minutes + Powell speeches suggest the recent rate cut was a 1-time event, the Bond Market is telling us that is not going to be true.

Previously, well before the recent FOMC rate cut, I illustrated via a Special Report on Rate Cutting Cycles, that the stock market tends to fall aggressively when interest rates are being cut.  For rationale, read the report please.

Possibly, the position Powell is taking could be to prevent concern related to that, but it is backfiring.

Although his comments seem to suggest this past rate cut was to balance the level of rates instead of it being a beginning of a cycle, he may also realize that a planned rate cutting regime could spark fear into the market, and he wants to avoid that.  His position may actually be intended to calm concerns from smarter investors who realize market weakness goes hand and hand with rate cutting cycles.

Powell may have recently tempered his comments in such a way as to suggest the recent cut was not the beginning of a rate cutting cycle, in order to calm the fears smarter investors would have had if they knew that the FOMC saw additional concerning and compelling reasons to cut again soon. 

Maybe Powell has taken the position he has to prevent concern.

Unfortunately for him, given the BOND Market reads recently and the inverted curve, the BOND Market is NOT buying it.  Not only do they seem to not believe his ‘one-off-cut’ position, but they worry now that if he is serious he may not even see the bigger picture well enough to act in advance of problems.

The BOND Market believes, if the FOMC acts after the fact, the conditions could get much more serious than they would be otherwise.

In conclusion, the read from the BOND Market is that they do not believe Powell, and they are losing faith that the FOMC will act ahead of larger problems.

Disclosure: Stock Traders Daily

Disclaimer: Past Performance is no guarantee of future results.  Substantial losses may come from investing in the stock market.  Consult with your personal financial advisor before making any decisions to invest.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Stock Traders Daily and is being posted with permission from Stock Traders Daily. The views expressed in this material are solely those of the author and/or Stock Traders Daily and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

trading top